IASB ISSUES AMENDMENTS TO IAS 12 –

DEFERRED TAX RELATED TO ASSETS AND

LIABILITIES ARISING FROM A SINGLE
TRANSACTION
INTERNATIONAL FINANCIAL REPORTING BULLETIN

2021/10
2 IFRB 2021/10 IASB ISSUES AMENDMENTS TO IAS 12 – DEFERRED TAX RELATED TO ASSETS AND
LIABILITIES ARISING FROM A SINGLE TRANSACTION

BACKGROUND
On 7 May 2021, the IASB issued amendments to IAS 12 – STATUS
Final
Deferred Tax related to Assets and Liabilities Arising from a
Single Transaction. These amendments clarify whether the EFFECTIVE DATE
initial recognition exemption applies to certain transactions Mandatorily effective for annual
that often result in both an asset and a liability being reporting periods beginning on or
recognised simultaneously. Such instances might include the after 1 January 2023, with earlier
initial recognition of leases from the perspective of a lessee or application permitted.
asset retirement obligations (AROs) / decommissioning ACCOUNTING IMPACT
liabilities. Reduce the scope of the initial
recognition exemption in IAS 12
EXPLAINING THE AMENDMENTS such that it does not apply to the
initial recognition of an asset or
liability which at the time of the
WHAT DOES IAS 12 GENERALLY REQUIRE? transaction, gives rise to equal
taxable and deductible temporary
Subject to certain recognition requirements for deferred tax differences.
assets, IAS 12 generally requires entities to recognise:
The accounting policies applied by
• Deferred tax assets arising from deductible temporary some entities prior to the
differences; and amendment may already be
consistent with these requirements.
• Deferred tax liabilities arising from taxable temporary
differences.

Deductible and taxable temporary differences are the result of differences between the carrying amount
of an asset or liability in the statement of financial position and the tax base. The tax base of an asset or
liability is the amount attributed to that asset or liability for tax purposes.

Recognising deferred tax assets and liabilities results in a tax charge in the statement of comprehensive
income that corresponds to when an entity recognises amounts in the statement of comprehensive income
rather than when an amount is included in the determination of taxable profit for tax purposes.

For example, assume Entity A purchases an item of property, plant and equipment (PP&E) for CU500. In
Entity A’s jurisdiction, that item of PP&E is depreciated for tax purposes over 4 years (CU125 per annum),
whereas Entity A depreciates the asset over 5 years (CU100 per annum), as that is the asset’s useful
economic life in accordance with IAS 16. Entity A recognises a deferred tax liability in years 1-4 as the
carrying value of the asset exceeds its tax base. The tax rate is 20% in Entity A’s jurisdiction. The only
other transaction Entity A enters into is a sale in each year of CU700.

Year Carrying Tax base Taxable Accounting profit Taxable profit Current Deferred Combined
value at at end temporary (700 – accounting (700 – tax tax tax tax
end of each of each difference depreciation) depreciation) expense effect expense
year year
1 400 375 25 600 575 115 5 120
2 300 250 50 600 575 115 5 120
3 200 125 75 600 575 115 5 120
4 100 - 100 600 575 115 5 120
5 - - - 600 700 140 (20) 120
3 IFRB 2021/10 IASB ISSUES AMENDMENTS TO IAS 12 – DEFERRED TAX RELATED TO ASSETS AND
LIABILITIES ARISING FROM A SINGLE TRANSACTION

While current tax expense varies over the 5-year period due to differences between accounting and tax
depreciation, the combined tax expense is consistent at CU120 per annum due to Entity A recognising a
deferred tax asset from years 1-4, which is subsequently reversed in year 5. This reflects the ultimate tax
consequences of purchasing the asset in each year that the asset is used, otherwise, tax expense would
fluctuate over time due to the different timing of deduction of the asset for accounting and tax purposes.
If deferred tax was not recognised, the tax expense of Entity A would fluctuate from CU115 to CU140
despite the difference between accounting and taxable profit only being on account of temporary
differences.

WHAT IS THE INITIAL RECOGNITION EXEMPTIONS (IRE)?

The initial recognition exemption (IRE) is an exception to the requirement to recognised deferred tax
assets and liabilities relating to all deductible and taxable temporary differences.

Prior to the amendments, IAS 12 required that deferred tax assets and liabilities be recognised for all
taxable and deductible temporary differences, except to the extent that the deferred tax asset or liability
arises from:

(a) the initial recognition of goodwill; or

(b) the initial recognition of an asset or liability in a transaction which:

(i) is not a business combination; and

(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

If the criteria in the IRE are met, deferred tax is not recognised, regardless of the fact that the carrying
amount and tax base of the asset and/or liability differ.

Modifying the earlier example, assume that Entity A purchases an item of property, plant and equipment
(PP&E) for CU500. In Entity A’s jurisdiction, the government considers the asset to be polluting, therefore,
to disincentivise its purchase, that item of PP&E has its tax depreciation ‘capped’ at 80% of the purchase
price (CU400).

At the initial recognition of the asset, its carrying amount (CU500) and tax base (CU400) differ, which
meets the definition of a taxable temporary difference, however, the IRE prevents the recognition of a
deferred tax liability because:

IRE Criteria Assessment (all ‘yes’ responses means the IRE

Does the difference arise from the initial
recognition of an asset or liability?
Is the transaction not a business combination?
At the time of the transaction, is neither
accounting profit nor taxable profit affected?
applies)
Yes, the purchase of the item of PP&E.
Yes, the acquisition of the asset does not meet the
definition of a business combination.
Yes, neither accounting profit or taxable profit are
affected at the time of the transaction.

Therefore, no deferred tax liability is recognised relating to the item of PP&E.

4 IFRB 2021/10 IASB ISSUES AMENDMENTS TO IAS 12 – DEFERRED TAX RELATED TO ASSETS AND
LIABILITIES ARISING FROM A SINGLE TRANSACTION

WHY HAS THE IASB AMENDED IAS 12?

IFRS 16 requires a lessee to recognise a lease liability and a right-of-use asset (ROU asset) for most leases.
Entities must determine the tax base of the lease liability and ROU asset, but in many jurisdictions, the
tax deduction for leases relates to the lease liability because amounts are deducted from taxable profit
when lease payments are made. In such cases, the carrying amount and tax base of lease liabilities and
ROU assets would be as follows (assume that both items are initially recognised at CU500):

Item Carrying amount Tax base Deductible/(taxable)

temporary difference
Lease liability 500 -1 500
ROU asset 500 - (500)
1
The tax base of a liability is its carrying amount (CU500) less any amount that will be deductible for tax purposes (CU500).

If an entity does not apply the IRE to this transaction, equal and offsetting deductible and taxable
temporary differences exist, which result in equal deferred tax assets and liabilities. These may be offset
in accordance with IAS 12 if certain criteria are met. As the ROU asset is depreciated for accounting
purposes and lease payments are made, the amounts of the temporary differences will fluctuate.

In 2019, the IASB became aware that there were differing views as to whether the IRE applies to taxable
and deductible temporary differences arising when a lessee initially recognises a right-of-use asset and
liability arising from a lease. If the IRE was applied, then an entity would not recognise deferred tax
either at the initial recognition of the lease or subsequently over the lease term, which would result in the
combined income tax charge fluctuating based the availability of deductions of tax purposes rather than
the recovery of the items’ carrying values over time.

Therefore, the IASB amended the criteria to which the IRE applies by introducing item (iii) below to clarify
this point.

Revised Initial Recognition Exemption Criteria

IAS 12 requires that deferred tax assets and liabilities be recognised for all taxable and deductible
temporary differences, except to the extent that the deferred tax asset or liability arises from:

(a) the initial recognition of goodwill; or

(b) the initial recognition of an asset or liability in a transaction which:

(i) is not a business combination; and

(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

(iii) at the time of the transaction, does not give rise to equal taxable and deductible temporary
differences.

In the case of the lease example above, the lease does give rise to equal taxable and deductible
temporary differences, therefore, the amendments to IAS 12 clarify that the IRE does not apply in this
case.
5 IFRB 2021/10 IASB ISSUES AMENDMENTS TO IAS 12 – DEFERRED TAX RELATED TO ASSETS AND
LIABILITIES ARISING FROM A SINGLE TRANSACTION

WHAT ABOUT LEASE ADVANCE PAYMENTS AND INITIAL DIRECT COSTS?

The initial carrying amount of lease liabilities and ROU assets may differ due to advance lease payments
and/or initial direct costs. For example, modifying the lease example above, assume that the lessee had
made an advance lease payment of CU50 and incurred initial direct costs of CU15. The carrying amounts
of the lease liability and ROU asset at initial recognition would be:

• Lease liability: 450 (500 – 50 advanced payment)

• ROU asset: 515 (450 + 50 advanced payment + 15 initial direct costs)

Assume that the advance payment and the initial direct costs are deductible for tax purposes when the
payments are made.

The IASB included an example in the amendments to IAS 12 to clarify how they should be applied in this
circumstance.

The advance payments/initial direct costs are analysed as follows:

Revised IRE Criteria – Advanced payment and initial Assessment (all ‘yes’ responses means the IRE
direct costs applies)
Does the difference arise from the initial The advance lease payment and initial direct costs
recognition of an asset or liability? arise from the initial recognition of a lease.
Is the transaction not a business combination? Yes, entering into the lease contract does not meet
the definition of a business combination.
At the time of the transaction, is neither No, taxable profit is affected at the time of the
accounting profit nor taxable profit affected? transaction because the advanced payment and
initial direct costs are deducted from taxable profit
when paid.
At the time of the transaction, does the transaction Not applicable
not give rise to equal taxable and deductible
temporary differences?

Therefore, deductible temporary differences of CU65 (CU50 advance payment and CU15 initial direct
costs) exist, and a deferred tax liability is recognised because the IRE does not apply.
6 IFRB 2021/10 IASB ISSUES AMENDMENTS TO IAS 12 – DEFERRED TAX RELATED TO ASSETS AND
LIABILITIES ARISING FROM A SINGLE TRANSACTION

The lease liability and the related component of the lease asset’s cost (i.e. CU450, the ROU asset apart
from the effect of advanced lease payments and initial direct costs) have been analysed as follows:

Revised IRE Criteria – lease liability and ROU asset
Does the difference arise from the initial
recognition of an asset or liability?
Is the transaction not a business combination?
At the time of the transaction, is neither
accounting profit nor taxable profit affected?
At the time of the transaction, does the transaction No, the lease liability and the related component
not give rise to equal taxable and deductible
temporary differences?
Assessment (all ‘yes’ responses means the IRE
applies)
The differences arise due to the initial recognition
of the lease. Neither the lease liability or the
corresponding amount of the lease asset’s cost have
tax basis.
Yes, entering into the lease contract does not meet
the definition of a business combination.
Yes, neither accounting profit or taxable profit are
affected at the time of the transaction.
do give rise to equal taxable and deductible
temporary differences.

Therefore, taxable and deductible temporary differences of CU450 exist for both the lease liability and
the related component of the lease asset’s cost, and deferred tax liabilities and assets are recognised
because the IRE does not apply.

The lease and its tax effects on initial recognition are summarised as follows (assume a tax rate of 20%):

Carrying Tax base Deductible/(taxable) Deferred tax

amount temporary asset/(liability)
difference
Lease asset
-Advance lease payment 50 - (50) (10)
-Initial direct costs 15 - (15) (3)
-Amount of the initial 450 - (450) (90)
measurement of the
lease
Lease liability 450 - 450 90

ARE LEASES THE ONLY TRANSACTIONS AFFECTED BY THE AMENDMENTS?

Any transaction that gives rise to equal taxable and deductible temporary differences may be affected by
the change in the scope of the IRE. For example, entities might enter into transactions where they acquire
an asset and simultaneously incur an obligation to remediate that asset in the future, sometimes referred
to as an asset retirement obligation (ARO) or a decommissioning liability. An ARO would be recorded by
recognising the liability with the offsetting entry recorded as a component of the cost of the asset
acquired.

WHICH ENTITIES MIGHT BE AFFECTED BY THE AMENDMENTS?

As noted above, some entities may previously have considered that the IRE applied in these cases. If so,
then the amendments will affect those entities.
7 IFRB 2021/10 IASB ISSUES AMENDMENTS TO IAS 12 – DEFERRED TAX RELATED TO ASSETS AND
LIABILITIES ARISING FROM A SINGLE TRANSACTION

WHAT ARE THE TRANSITIONAL REQUIREMENTS?

Entities are required to apply the amendments for annual reporting periods beginning on or after 1
January 2023. Earlier application is permitted. If an entity applies the amendments for an earlier period,
it is required to disclose that fact.

Entities are required to apply the amendments to transactions that occur on or after the beginning of the
earliest comparative period presented (i.e. from 1 January 2022 for entities providing one year of
comparative information). The IASB decided to not require retrospective application of the amendment,
because doing so would require entities to retrospectively assess whether each lease and decommissioning
obligation gave rise to equal taxable and deductible temporary differences, which may be onerous.

At the beginning of the earliest comparative period presented, entities are required to recognise deferred
tax assets (subject to the recoverability requirements of IAS 12) and deferred tax liabilities associated
with:

(i) Right-of-use assets and lease liabilities; and

(ii) Decommissioning, restoration and similar liabilities and the corresponding amounts recognised
as part of the cost of the related asset.

The effect of recognising these deferred tax items is reflected as an adjustment to the opening balance of
retained earnings (or other component of equity, as appropriate) as at that date.

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